Similar business test for losses | KPMG | AU

Similar business test for losses

Similar business test for losses

John Bardsley, Corporate Tax Partner, analyses the proposed new ‘similar business test’ for the tax deductibility of prior year losses.


Partner, Corporate Tax

KPMG Australia


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One of the 'sleeping beauties’ in the Government’s National Innovation and Science Agenda (NISA) is a proposal to supplement the same business test with a new and more flexible similar business test. Treasury recently published Exposure Draft legislation for consultation. 

Under current law, where there has been a change in the majority ownership of a company, the same business test can be used to enable prior year losses to be deducted against current year taxable income. The requirement that the company’s business be the same has produced practical difficulties for companies trying to satisfy this test. For instance, perversely, the test can actually deter a company from reforming its business to return to profit – such as by seeking out new business opportunities. 

The proposed test provides a lower threshold – which should assist some companies with utilising tax (including capital) losses as well as claiming bad debt deductions. In summary, the similar business test compares the business carried on before the ownership change (‘former business’) with the business carried on in the income year that the company wishes to deduct a prior year loss (‘current business’). 

The question then is whether these two businesses are similar. When answering that question regard must be had (but is not limited) to the following factors:

  • the extent that income generating assets used in the current business were also used in the former business 
  • the extent that the sources from which the current business generates assessable income were also income sources of the former business 
  • whether any changes to the former business are changes that would reasonably be expected to have been made to a similarly placed business. 

The Explanatory Memorandum to the Exposure Draft indicates that these factors allow for changes resulting from attempts to grow or rehabilitate a business. 

This measure will only apply to losses incurred on or after 1 July 2015 – it will not assist with the utilisation of losses incurred in the current or previous income years. Accordingly, the new test will supplement rather than replace the same business test. 

Submissions are due by 22 April 2016. 

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